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| *Ostroff, Fair and Company>>>Canada Taxes |
Please explain the recent changes regarding income trusts in Canada? |
The finance minister recently stop short a loophole regarding income trusts? The papers don't say more that that, except that the business community is furious. Any well read Canadians or business buffs; can you help me out? Thanks. Essentially the issue that both the Canadian Federal and Provincial Governments had to deal with in connection with income trusts had two major elements: 1) A severe immediate reduction in positive cashflow from corporate income taxes, 2) A tax leak in favour of foreign investors who benefit from favourable tax rates on Canadian source income called for under various international income tax treaties. The first problem was the most worrisome. Unlike corporations, income trusts do not pay any income tax. At the end of its fiscal year an income trust allocates all of its, otherwise taxable, income to its investors. Some of these investors are non-residents of Canada who pay a limited amount of Canadian income tax (usually 15%) if they live in a country that has a bi-lateral income tax treaty with Canada. The vast majority of investors in income trusts are individual Canadians. In most cases these investments are held in tax-defferred pension and retirement funds meaning that the current income attributed to them from their investments will not be subject to personal income tax in their hands until such time as they are retired and begin to draw on their pensions. Given that most of these people are between 45 and 60 years years of age, the Government is looking at having to wait for 10 to 15 years before they start to collect personal income tax on the income that was allocated by these trusts to their investors. As many people know from personal experience, the timing of your cash-flow is often more important than the amount of money you earn. The same is true for governments. They have bills to pay and if the cash isn't there, problems start to arise with your creditors. In the pre-income trust era, an investor would buy shares in a company on the stock market. The company would pay the shareholder a dividend out of available cash derived from its current earnings after having put aside enough for capital reinvestment and corporate income taxes (typically in the 30-35% range for large companies). Ths means that the Government collects this corporate income tax within six months of the company's fiscal year-end. If an investor held his shares in the company outside of a deferred retirement arrangement, the dividend he received would recieve favourable personal income tax treatment recognizing that the corporation had already paid corporate income tax on the income from which the dividend was paid. In theory, the combined corporate and personal tax burden should approximate the same amount of tax that the individual would have paid on the same level of income had he/she earned it directly through their own personal efforts. Even if the individual held these shares in a deferred retirement plan the only tax that the Government does not receive right away is the personal income tax on the dividend paid by the company to the shareholder. This is clearly much less than if both the corporate and personal income tax burden was deferred for a number of years. There are a few other reasons why the government saw fit to tax income trusts but as I see it this is the main reason. TIMH Source(s): 37 years of Canadian Tax experience |
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